Financial institutions, Insurance and Private sector

Policy

Financial institutions

The European Investment Bank[1] invested €18bn in climate action, of which €16bn in the EU (30% of its overall lending), with a growing amount dedicated to climate-resilient projects that improve adaptation to climate change impacts. Climate change considerations are mainstreamed in all EIB sectoral policies and integrated into all operational activities. They are also systematically included in all EIB project appraisals to make the Bank’s lending portfolio across all sectors more climate-friendly.

The European Bank for Reconstruction and Development[2] has a special mandate to promote the transition to market economies, investing in private sector projects that have a transition impact only. Climate change considerations are mainstreamed in project appraisal and climate resilience is considered both in terms of risks and business opportunities as far as it has transitional impact.

The European Commission has started involving Commercial banks so as to better understand current practices on integration of climate change adaptation in their activities.

Insurance

Insurance can be a valuable tool for adaptation in three main ways: helping to manage climate change risks; providing incentives for risk prevention; and providing information on risk (Courbage and Stahel, 2012). The insurance sector is arguably the most advanced in evaluating risks and opportunities. Major adaptation initiatives in the insurance sector, to date, have focused around building institutional networks that address the common risks to the industry through collaboration. It is likely that the insurance sector leads in this area due to its vulnerability, but also because of its historical experience in risk management and climate-related risks.

The Commission is preparing a paper on the prevention and insurance of disasters, foreseen for adoption in 2013. A stakeholders' involvement process would then follow, with the objective of identifying good practice in the EU and detailing the need for additional information at EU level. The objective is to ensure that insurance, both as a sector and as an instrument for adaptation, provides the adequate incentives for investments and business decisions so as to secure the long-term resilience and competitiveness of the EU's economy. Efficient market functioning would ensure that the potential costs associated with increased insurance premiums in vulnerable areas would be outweighed by the avoided losses in case of natural disasters.

Private sector involvement

A changing climate represents both a threat to economic activity and physical assets and an opportunity for new businesses and investment. The private sector responds in two ways:

First, companies aim at value protection to ensure the resilience of physical assets and planning responses to maintain business as usual. Climate Change will affect the risks that companies are already facing. Therefore, companies are expected to ensure their long-term resilience, helping shareholders to understand the risk that climate change presents to their portfolios. Physical risks to fixed assets and infrastructure, impacts on supply chains, and shifting patterns in demand for goods and services could potentially also become material factors in the corporate credit risk assessment of banks. Governments worldwide have a key stake, since regional events can have global impacts (e.g. the floods in Thailand in 2011 caused significant physical damage and major disruption to supply chains across the globe).

Secondly, climate change adaptation offers possibilities for value creation. Adaptive practices help suppliers, stakeholders, and customers adapt to a changing climate. Innovative solutions can, however, be also an important driver of future business and growth, also for the SME sector. The necessary investment in private infrastructure is expected to trigger additional investment and to create jobs. Unlocking this potential for value creation can additionally foster economic growth in Europe.

[1] The EIB is the European Union’s bank. As the largest multilateral borrower and lender, they provide finance and expertise for sound and sustainable investment projects, mostly in the EU. The bank is owned by the 27 Member States and the projects we support contribute to furthering EU policy objectives.

[2] The European Bank for Reconstruction and Development fosters transition to market economies in countries from central and eastern Europe to central Asia and the southern and eastern Mediterranean. The EBRD is owned by the European Union, the European Investment Bank and 63 countries.